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There’s Only One Taxpayer

With the City of Ottawa’s 2016 budget now behind us, it’s time to reflect on what exactly it means to raise taxes and fund a sustainable city.

The 2016 budget includes a tax increase of two per cent for residential property owners, a six per cent increase to water and sewer rates, and a 2.5 per cent transit fare hike. To some, these numbers may seem reasonable and prudent and a sign of strong fiscal management structured to plan for our future.

However, the City of Ottawa, and indeed most major Ontario cities, are also using other taxing mechanisms that are masking a longer-term problem that needs to be acknowledged and discussed. Under the current funding model, the continued healthy growth of Ontario cities is not sustainable, and the very fixes being put into place to combat these issues are exacerbating the problem.

During the last half of the 20th century, Canada became an increasingly urbanized country and in order to keep up with this transition, cities had to increase expenditures on infrastructure. These expenditures had been shared successfully by the provincial and municipal levels of government but when the recessions of the early 1980’s began, changes had to be made. Provincial tax revenues declined and they could no longer afford the previous levels of municipal transfer payments. In order to resolve this shortfall they created the concept of ‘downloading’ whereby significant costs were shifted onto the shoulders of municipal governments. It was a little like the old game of ‘hot potato’. The Province had “solved” its financial problems by simply passing them on to cities.

Municipal governments initially tried to cope by raising property taxes but by the late 1980’s taxpayer unrest had reached new highs and a decision had to be made either to reduce infrastructure spending or find new sources of revenue. If government had decided to bring expenditures in line with their ability to pay and reduced spending accordingly, the system would have eventually found a new equilibrium.

Regrettably, government discovered a method of raising significant new tax revenue and happily for elected officials, its existence would be hidden from the general public and only incurred by a relatively small group pf people who were new home buyers and renters of new accommodation. This was an ideal solution because it would allow political leaders to continue ‘city building’ without increasing property taxes very much. Even better, the tax could be rolled into a new homebuyer’s mortgage and paid for over 30 years, so the pain would be negligible, or so they thought.

The Ontario government created the ‘Development Charge Act’ in 1989 that would henceforth allow municipal governments to collect whatever amount of tax they needed but only from new home buyers and developers of new rental housing. In order to head off opposition to the new tax, governments used the technique of misdirection by pitting urban against suburban residents and came up with the phrase, “growth must pay for growth”. This implied that new suburban residents hadn’t been paying their fair share and so henceforth, enlightened government would ensure that they did.

This worked well for several years. However, urbanization continued to increase, the number and level of services being provided by municipalities expanded and as a consequence Development Charges had to increase at a dramatic rate. In fact, this tax increased from approximately $2,000 per home in 1989 to $35,000 per home in 2015.

As with all things, when prices increase, demand declines and so the housing affordability crisis now being experienced in Ottawa has resulted in 25% fewer homes being built than only 2 years ago. This has resulted in a proportional decline in city development charge tax revenues. We are now facing the same ‘déja vu’ moment as in the late nineteen eighties and described in the opening paragraphs of this column. Will government make a conscious decision to bring their spending in line with revenues or will they look for methods of generating the additional tax revenues required to fund continuing expenditure increases.

Time for a Reality Check

In late December 2015, the Province of Ontario approved a new tax that every municipality in Ontario can adopt and bury in their existing Development Charge Bylaw. Once again, the existing property tax base will not be affected, and it will be ‘business as usual’. This new transit tax, estimated to be approximately $5,000 per home will mainly be paid by a rapidly disappearing breed of new home buyers, as well as by renters of new units. (Some will be paid by owners of commercial and industrial developments.) Once again, it will be included in the price of new homes, be essentially invisible to media and tax payers at large and be rolled into a new home buyer’s mortgage.

The City of Ottawa has advised that they intend to adopt the new tax as early as possible in 2016. It appears that once again, there is no intention to try and reduce expenditures when access to an easy new tax is available.

Municipal governments in Ontario have been using new home buyers and renters to pay for debt that should rightly be shouldered by all city residents which had been the practice up until the introduction of the Development Charge Act in 1989. Canadians have always cared about their neighbours and have shared costs that are too great for one individual or family to shoulder. This is why we share education, healthcare and transportation costs. But a decision was made in 1989 to stop sharing city infrastructure costs because it was politically expedient— not because it was the right thing to do.

Constantly increasing levels of taxation on small minorities of the population to fund citywide infrastructure is not sustainable. The costs of these projects should rightfully be borne by all city residents and that is the only means by which equilibrium can be restored and the housing affordability crisis resolved. There should only be one level of tax payers when funding city building.